Breakout

Market nose dive: Major indices shed recent gains

Jeff Macke
Breakout

The Dow Jones Industrial Average (^DJI) fell 267 points on Thursday as any doubts about whether or not the market is in the middle of a full-blown correction were put to rest. Investors who got lured into stocks during yesterday’s rally were quickly flushed. Only the closing bell could stop the losses but not before the S&P 500 (^GSPC) had been hit for a 2% loss and the Nasdaq dropped another 3%.

As Aaron Task and I discuss in the attached clip, the selling was particularly bad in some of the biotech and social media stocks that were market leaders as recently as last month. Facebook (FB) gave back almost all of the 7% gain it posted on Wednesday and the iShares biotech ETF (IBB) got crushed to the tune of 6%.

More concerning to professional investors was pronounced weakness in the blue chip stocks that had been serving as safe harbors for more conservative investors. The Dow and S&P 500 were at record highs as recently as Friday morning’s opening bell. From that moment on every rally attempt has been met by aggressive selling from institutional investors and Main Street shareholders alike.

Since Friday’s open, blue chip bank stocks and tech stalwart Microsoft (MSFT) have dropped 4%. The Dow Jones Transportation Index has been hit for 3% and the Consumer Discretionary Sector ETF (XLY) has been hit for about 4%.

Not finding safety in stocks, investors have been putting money into gold and the iShares two-year bond ETF (TLT) both of which have tacked on between 1 and 2%.

Crowded IPOs and Animal Spirits

The financial media will spend the next 18 hours trying to explain these drops but they’re just guessing. Headwinds like a strong Yen, weak economic data in China and the United States’ own troubled economy have been present for the last year, at least. The truth is this sell-off has been a long time in coming and has finally arrived. The same animal spirits that have been driving stocks higher for months are now turning investors into slightly panicked sellers.

Not that the pain is so bad. The Nasdaq is down more than 7% but the S&P blue chip index has dropped less than 4% from its highs. Sitting at about 1,840 now, the S&P would have to fall another 100 points before it got the levels it hit during the sell-off that ended in early February. Stocks would have to drop more than 300 points, all the way to 1,517 for this selling to qualify as an official Bear Market.

Adding to the pessimism is the willingness of investment banks to keep forcing Initial Public Offerings into the market. Today it was Ally Financial (ALLY) which was sold to the public at the bottom of its pricing range and promptly fell another 4% during active trading. It’s probably no coincidence that shares of quintessentially “hot money” IPO Grubhub (GRUB) (a food ordering and delivery dot-com) went public to much fanfare on Monday morning. The dancing foodstuff mascots that rang the bell on the NYSE marked the exact top for stocks.

Shares of Grubhub fell 13% today.

For now this just looks like a run of the mill correction triggered by far too many IPOs and an increasingly skeptical investing public. This too shall pass, but investors looking for quick resolution should brace themselves for disappointment.

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